Q3 2024 Xtant Medical Holdings Inc Earnings Call

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Speaker Change: Welcome to the Extant Medical Holdings Inc. third quarter 2024 conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. I would now like to turn the call over to your host Brett Maas, Investor Relations. Please go ahead sir.

Brett Maas: Thank you, operator. Joining me today is Sean Browne, President and Chief Executive Officer and Scott Neils, Chief Financial Officer.

Brett Maas: Today's call is being webcast and will be posted on the company's website for playback.

Brett Maas: During the course of this call, management may make certain forward-looking statements regarding future events and the company's expected future performance.

Brett Maas: These four looking statements reflect excellence current perspective on existing trends and information and can be identified such words as expect plan will may anticipate believes should intends. In other words, with similar meaning.

Brett Maas: Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those noted in the risk factors section of the company's annual report on Form 10-K, followed by the SEC on April 1, 2024, and in subsequent SEC reports and press releases.

Actual results may differ materially.

Brett Maas: The company's financial results press release in today's discussion includes certain non-GAAP financial measures. Please refer to the non-GAAP to GAAP reconciliations which appear in our press release and are otherwise available on our website. Note that our Form 8K filed with our financial results press release provide a detailed narrative that describes our use of such measures.

Speaker Change: For the benefit of those of you who may be listening to a replay, this call was held and recorded on November 12th at approximately 4.30 p.m. Eastern Time. The company declines any obligation to update its forward-looking statements except as required by law. Now I'd like to turn the call over to Sean Browne.

The End of the World

Sean Browne: Thank you, Brett, and good afternoon, everyone. I am pleased to announce a solid growth for the third quarter with 12% growth for the quarter and 36% growth year to date.

Sean Browne: We are on pace to achieve our full-year revenue guidance of $116 to $120 million, which we reaffirmed today. This range represents total annual revenue growth of approximately 27% to 31% compared to the full year 2023.

Sean Browne: Despite solid year-over-year growth for the quarter, sales were softer than we expected due to slight delays in our launch of two new products, Osteovibe Plus, our new stem cell product,

Sean Browne: experienced validation delays. In Cortera, our new pedicle screw system was met with supplier issues. We have since overcome these challenges and both product lines were released in late September and are well received by our distributors and surgeons.

Sean Browne: We are bullish on these products and believe they will help us finish strong for fiscal year 2024.

Sean Browne: From a profitability perspective, our adjusted EBITDA results for Q3, which Scott will cover in a moment, reflect the effect of these product delays I just discussed.

Sean Browne: Year-to-date, we remain profitable on an adjusted EBITDA basis with 435,000. In addition, we anticipate being adjusted EBITDA positive in Q4 of 2024 as we continue to focus on profitability and self-sustainability.

Sean Browne: Another important development in October, we signed a licensing agreement with a significant player in the advanced wound care market. The deal includes licensing one of our three Q codes and the corresponding Simplymax dual layer amniotic membrane.

Sean Browne: We received a 1.5 million upfront payment for this in October and the terms of this agreement provide for full licensing and royalty revenues

aggregating a minimum of 3.75 million in 2025.

Sean Browne: This incremental revenue will bear little to no incremental costs and will therefore carry high margins that will fall directly to our bottom line.

Sean Browne: As a historical backdrop, and this is taking a step back, but to put into context where our business has been and where we are going. Remember, at the end of fiscal year 2022, so no less than two years ago, we were only a $58 million revenue business.

Sean Browne: By the end of this year, we expect to have doubled in size with 2024 revenues between 116 and 120 million.

Sean Browne: The acquisitions we made last year have greatly assisted us in first getting greater scale.

Sean Browne: Scale is extremely important when it comes to the continued growth of our GPO and IDN agreements and without access to hospitals Our businesses will our business will not grow

Secondarily, the SurgeAlign acquisition has revitalized our XStand hardware line.

For instance.

Sean Browne: Our COFLEX Interlaminar Stabilization Device is a one-of-its-kind motion preservation alternative that perfectly complements our ASC-focused offering. That ASC offering includes our Silex SI Fusion Device and Axel, our Inner Spinous Process Device.

Sean Browne: With the release of Cortera, we now have a best-in-class pedicle screw system to complete our hardware offering.

Sean Browne: From a biologics perspective, our number one priority for fiscal year 2024 was to bring all manufacturing in house.

The strategic rationale for that was twofold.

First, we've been on the wrong end of supply disruptions.

Sean Browne: with some of our fastest growing products. In the past three years, we believe this accounted for approximately $10 to $15 million in lost revenue. By manufacturing our products in-house, we control our supply chain, the production, and the availability of our products to sell.

Sean Browne: The gross margins for our distributed stem cell, growth factor, amnio, and synthetic products range from mid 40s to 60% gross product margins.

Sean Browne: to the low 90% margins. Moreover, strategically, XN is now positioned to grow more profitably as an OEM supplier for companies in the spine market and other adjacent markets.

Sean Browne: For instance, our new Amnio line, which we expect to sell about a million dollars of our Extant brand this year, is a great addition for us as a surgical barrier for spine procedures. With our new offering, we can now serve more spine customers with a better product and substantially better margins.

Sean Browne: Similarly, our new stem cell product line has created a terrific OEM opportunity and not only spine but also in the trauma and foot and ankle markets.

Sean Browne: The beautiful part about OEM deals are that they do not carry any sales and marketing expenses, thereby carrying 60 to 70% contribution margins.

Sean Browne: Now, shifting over to operational leverage, one important concern that our shareholders have voiced and I would like to address directly is our operational leverage. I would like to assure all of you that we continue to find ways to reduce our expense base as we complete the integration of the SurgeLine businesses and keenly focus now on profitability.

Sean Browne: Rounding out fiscal year 2024. So fiscal year 2024 is shaping up largely as we expected with the second half performing better than the first half as we implemented actions and improvements to address supply chain challenges and gain greater control over the production of our products.

Sean Browne: We've worked through most of the challenges that have impacted our fastest growing products and in May we raised our original revenue guidance

Sean Browne: if you remember was 112 to 116 million when it became clear that many of the issues affecting our surge line hardware line and our distributed non-manufactured stem cells have been resolved.

Sean Browne: We remain on track to deliver the revenue guidance that we established back in May of 116 to 120 million with what we believe will be a breakout fourth quarter with all of our hard work finally paying off with increased revenues

Now moving to our new product pipeline.

Sean Browne: Like every healthy, robust organization, we continually innovate with a deep pipeline of new products.

Sean Browne: During our turnaround, we expanded our biologics product offering from two product categories to five.

which helped enhance our growth profile. Moreover,

Sean Browne: We are one of the few orthobiologics companies that offers the complete line of orthobiologics, which includes allograft, demineralized bone matrix, synthetics, viable bone matrix, or stem cells as we call them, and growth factor.

Sean Browne: Over the next two quarters, we will be the only orthobiologist company that is vertically integrated where we make our own products and sell them under our own brand.

Sean Browne: Along with our amnio products, I also mentioned that we have completed the production of our own viable bone matrix, better known as stem cells.

Sean Browne: This has been our fastest growing product line for Extant over the last three years. However, our growth of this product has been constrained due to outside vendors that we relied upon with this fly chain.

Sean Browne: With now a far superior product available, with a significantly improved cost profile, we believe we will be able to profitably grow our Extant brand in the stem cell market significantly.

Sean Browne: Moreover, there continues to be a supply shortage of stem cells, and we believe we can become a major OEM provider for other orthopedic companies with this product line. In fiscal year 2025, we expect our OsteoVive Plus viable bone matrix will be our largest product line.

Sean Browne: Lastly, I briefly mentioned earlier the release of our Quartera Pedicle Screw System. This new system is a next-generation posterior system that has a feature-rich screw designs with a comparatively low profile and newly designed locking mechanism.

Sean Browne: We released Cortera at NAS and we received rave reviews from prospective surgeons. We expect this rollout will help drive nice growth for Xtent and Q4 and beyond.

Sean Browne: These are just a few of the exciting new products that are coming down the pipe. In short, we have a fantastic product pipeline of short to midterm winnable opportunities for clinically validated, commercially proven products that serve large and growing markets.

Sean Browne: These future products will take advantage of our existing operational and quality infrastructure. Most importantly, they will not require significant investments in new product development or overly big lifts in clinical evidence or regulatory clearances.

Sean Browne: Moving forward, we're focused on becoming operationally self-sustaining by controlling our supply chain and less reliant on production outside our control.

Sean Browne: We believe that self-reliance will allow us to be a larger and more diverse producer of biologics. Moreover, producing our own products should dramatically improve our margin profile, coupled with an expanded product line that brings additional transformative treatment options to a large and growing patient population.

Sean Browne: Most importantly, we believe these actions will help us to get to positive adjusted EBITDA during the fourth quarter of 2024. Now, I'd like to turn the call over to Scott, who will discuss our third quarter 2024 financial results.

Scott Neils: Gross margin for the third quarter of 2024 was 58.4% compared to 61.3% for the same period in 2023.

Scott Neils: The decrease was primarily attributable to reduced throughput resulting from the delayed launch of internally produced stem cell product, which was partially offset by greater scale.

Scott Neils: Third quarter 2024 operating expenses were $20.1 million compared to $18.7 million in the same period a year ago. As a percentage of total revenue, operating expenses were 71.9%.

Scott Neils: compared to 74.8% in the same period a year ago. Sequentially, operating expenses declined $1.4 million and remain consistent as a percentage of revenue compared to Q2 2024.

Scott Neils: General and administrative expenses were seven and a half million dollars for the three months ended September 30th, 2024, compared to 7.1 million dollars for the same period in 2023.

Scott Neils: Sales and marketing expenses were $11.9 million for the three months ended September 30, 2024 compared to $11.1 million for the same quarter last year. This increase is primarily due to higher commission expenses related to increased sales.

Scott Neils: Research and development expenses were $701,000 in three months ended September 30, 2024, an increase from $490,000 in the third quarter of 2023. This increase is primarily due to increased headcount related to our increased focus on new product introduction.

Scott Neils: I'll note that net income during the third quarter of 2023 included a $13.3 million gain on bargain purchase and tax benefit resulting from our acquisition of the SurgeLine hardware and biologics business.

Scott Neils: Adjusted EBITDA for the third quarter of 2024 was a loss $193,000.

Scott Neils: compared to adjusted EBITDA of $458,000 for the same period in 2023.

Scott Neils: As of September 30, 2024, we had $7.1 million of cash, cash equivalents, and restricted cash. Net accounts receivable of $20.5 million, inventory of $41.9 million, and we had $3.8 million available under a revolving credit facility.

Speaker Change: Thank you. At this time we will conduct the question and answer session. If you would like to ask a question please signal by pressing star 1 on your touchtone phone.

Speaker Change: And our first question will come from Ryan Zimmerman with BTIG.

Speaker Change: Hi everyone, this is actually Izzy on for Ryan. So thanks for taking the questions. I just wanted to start out about your commentary on some of third quarter results. I guess I know you guys noted that some of the product delays impacted the top line, but you also called out some softness in the procedure environment. So I was just wondering if you could provide some more color around that and what trends you've been seeing in so in fourth quarter so far.

Speaker Change: I'll jump in this and then if you want to add any color. So, Izzy, first of all, thanks for the question. Second of all, what we saw was

Speaker Change: Actually, the summer months of July, July actually was soft, August was very soft, and it was actually

Speaker Change: tied directly to just our doctors going on vacation. It's as simple as that, and I hate to say it, but as we become more of a hardware company, there's more of that, that, you know, a hardware doctor is one that's gonna be much more impactful, both upside and downside.

Speaker Change: Now, good news is we saw it bounce back in September, and so in the fourth quarter, we're seeing normal things going back to normal. So if I may add one other element to this.

Speaker Change: This is the first year since really COVID, where we at Extant have seen this summer what I say slowdown, which was customary in almost all of the other, you know, you look at healthcare writ large, but in particular in the world of spine.

Speaker Change: But when you look at when COVID hit in 20 and 21, the hospitals and systems and areas of the country were just getting shut down. In 22 and 23, we just saw doctors trying to make up for all of those, even though they may have taken a week off, they weren't taking 23 and four weeks off like we saw this summer.

Speaker Change: And so this is the first summer that we've seen where things actually went back to normal prior to COVID. So that is how I would answer that. Scott, do you have any more that you want to add to that?

Scott Neils: No, I think that's a pretty comprehensive account of kind of the new development in what historically, or of late, has not existed in the way of seasonality.

Speaker Change: Got it. That's helpful. And then just shifting gears a little bit. Do you guys mind speaking to the revenue mix this quarter between orthobiologics and spinal implants? I was just curious if as you guys transition to in house manufacturing, you expect to see a change in this mix and kind of what a steady state may be going forward.

Scott Neils: Scott, I'll let you take that then I'll add my color.

Scott Neils: Sure, you know, I think during the course of 2024, we see it splitting out roughly 55-45%. I think as we move into future years, we'll see Biola starting to pick up additional revenues such that will pull away and take on more of our overall revenue share.

Speaker Change: Yeah, nothing more to add to that. Yeah. And then I know we're not going to get any guidance today. But I was just wondering if you guys have any early considerations for us to keep in mind as we start to think about 2025.

Scott?

Scott Neils: Yeah, I mean, as it comes to 2025 guidance, we'll provide formal guidance when we release Q4 earnings in March, but I think broadly speaking,

It is still early yet, of course.

Scott Neils: But I think on the revenue side, you know, we'll look for revenue growth approaching double digits.

Scott Neils: I think we'll look for perhaps maybe three to four points in Wave Gross Margin Improvement and then continuing improvement on operating leverage in the Wave OpEx.

Speaker Change: All right. Thanks, guys. Thank you for taking the questions. Thanks, Izzy. Appreciate it.

Speaker Change: As a reminder, if you would like to ask a question, please signal by pressing star one at this time.

and we'll move next to Chase Knickerbocker with Craig Helm.

Speaker Change: Hi guys, it's Jay Khan for Chase. Thanks for taking the questions. I'm just wondering, if we think about Q4 in 2025, what sort of contribution do you think VBN can have and is this contribution more on the white label side or the distributor side? You know, maybe talk us through the mix. Thank you.

Speaker Change: Scott, you want to jump in on this? I'll add my color.

Scott Neils: Yeah, I think probably going back to Q3, what we laid out during the course of Q4, we expect minimal impact.

Scott Neils: on the distributor side. I think the pick up in Q4 will be on the white label side.

Scott Neils: And then as we get into 2025, we'll see predominantly more.

Scott Neils: Again, in the private label and white label side, but we'll, we'll still see a modest significant pickup on the distributor side.

Scott Neils: And a lot of that is tied to the fact that we're still working through the inventories of our distributed products. That's why we won't see it as much or even at all.

Scott Neils: from our own product in the fourth quarter, but we will start to see it definitely in the first quarter of 2025.

Speaker Change: Okay, thank you. That's helpful. And then one more for you guys. How are you thinking about just profitability next year and where we should be modeling leverage? Is it going to be largely on the gross margin side, or maybe more on the operating line?

Speaker Change: I'll jump in here then, Scott, I'll let you dive in. So more broadly, it's going to be a little bit of both, right? Improved margins, improved leverage on our expenses. And then I think just also the top line.

Speaker Change: sale of hopefully higher margin products. So from a profitability perspective, we think that's pretty good next.

Speaker Change: Yeah, I'll just add to that, you know, if we continue the trend that we've seen during the course of 2024 with sequential improvement and operating leverage, I think that helps significantly in way of profitability and I think within gross margin we see something similar where we can pick up maybe three to four points during the course of 2025.

Thanks very much, guys.

Speaker Change: And there are no further questions. I apologize. We do have an additional question that will come from Ankar Sagar. Please go ahead.

Speaker Change: Hey, good afternoon, Sean and Scott. Thank you for taking my questions. I have two. One, I think I caught a, there was a mention of some licensing agreement in the press release for the earnings release.

Speaker Change: you know, something regarding the Q codes that can actually provides a minimum of, you know, north of 5 million in royalty fees. I would appreciate if you can just elaborate on that. What opportunity is that? And when do you expect that?

So we get the first.

Speaker Change: Upon signing, we had a million, 1.5 million up front. And then we have a minimum of 3.75 million that would be coming in this in fiscal year 2025. Those are minimums.

Speaker Change: A lot of it depends on what goes on within that wound care and the LCDs that are sitting out and people are waiting for. The good news is most of that 3.75 is front ended in the first half of the year.

Speaker Change: and but we actually we expect that this could be significantly more if the company we're working with does what we think it can do so so that's that's really just kind of what the minimum of that deal is.

Speaker Change: So you expect some ramp in Q4 top line, and there is still a delta between 116 and 120. What is your confidence level on that, achieving that guidance?

Speaker Change: probably even coming on the high end. Is it just the new products that can probably add to it? I mean, is that the OEM portion of it?

Speaker Change: Yeah, it's both. It's the OEM. Well, first of all, even some of the things that were ordered in the third quarter, we couldn't ship and got moved into the fourth quarter. So that's a little bit of what happened. Yes, we will see a nice pickup in our OEM business. So that will happen. But we're also going to see a nice pickup in our Cortera business.

Speaker Change: and Quartaro. If you know anything about pedicle screws, the one thing that's great about it, it pulls through a lot of other biologics too.

Speaker Change: So in general, you know, we're feeling good about the 116 to 120. And, and I'd love to love to lock it down tighter than that. But, but I'm going to stay with what we've had right there.

Speaker Change: Okay, okay. And then just one more for Scott. In terms of, I think, you know, Q4 will probably have, you mentioned, you know, positive cash flow.

Speaker Change: I think Q1 is where you have the sales and commission so next year, but you know, beyond that, I think you mentioned in Q2 that the company does expect to be, you know, cash flow break even or generate positive on cash.

Speaker Change: Is that, you know, predicated on the revenue growth and the gross margin improvement or even without that, you know, the model, you know, can we can get the cash flow break even?

Speaker Change: Well, it reflects a few things, maybe starting first with Q4. I think given the timing of some of the Q3 revenue

that'll threaten.

Speaker Change: from operations within Q4, just because we had anticipated that revenue being on the balance sheet as receivables that would be collected during Q4.

Speaker Change: but in turn, we'll see more of that remaining in receivables in Q4. But looking forward into 2025, it's not only the revenue growth, it's the type of revenue, it's more effective or more efficient revenue from a working capital standpoint in that it's revenue at the faster DSOs going into the OEM channel. And in addition to that,

Speaker Change: You know, rather than putting inventory out on consignment basis, we're moving it in finished goods and shipping it. So we carry less much or much less.

Speaker Change: Capital within the inventory line item on our balance sheet and we expect that to speed up our cash flows and be more efficient from a working capital standpoint.

Okay. All right. Great. Thank you for taking my questions.

Speaker Change: And there are no further questions at this time. I'd like to turn the conference back to management for closing remarks.

Great. Thank you, operator.

Speaker Change: We made great progress in the third quarter of 2024. As we close out 2024, we believe there are two key drivers for Xtent to become a self-sustaining, profitable company. First,

Speaker Change: build our own biologics. This is a big quarter for our internal development team. The more we produce of our highly profitable biologics, the less we rely on other manufacturer supply chains. We believe this one step alone will help us get to positive adjusted EBITDA in Q4.

Secondly...

Speaker Change: In closing, I want to reiterate our mission to honor the gift of donation by allowing our patients to live as full and complete a life as possible. I appreciate the dedication of our valuable employees. Without them, our success and achievements would not be possible.

Speaker Change: Thank you for joining us today and for your continued support.